Basis trading

Basis trading,

Definition of Basis trading:

  1. In the context of futures trading, the term basis trading refers generally to those trading strategies built around the difference between the spot price of a commodity and the price of a futures contract for that same commodity. This difference, in futures trading, is referred to as the basis. If a trader expects this difference to grow, the trade they will initiate would be termed "long the basis", and conversely, a trader enters "short the basis" when they speculate that the difference will decrease.

  2. A method of trading whereby an investor buys one security and subsequently sells another similar security, with the intent of making a gain from one side of the other based on an apparent mispricing.

  3. Basis trading is common across futures commodities markets where producers look to hedge the cost of production against the anticipated sale of the commodity they are producing. The typical trade comes when one is midway through a production cycle and looks to lock in a favorable price for their product.

Meaning of Basis trading & Basis trading Definition